This article summarises a keynote speech delivered by Professor Humayon Dar at the 4th China-UAE Conference on Islamic Banking and Finance (CUCIBF IV) held at Chengdu (China) on January 7-8, 2020. He highlighted some interesting opportunities that may mutually benefit Islamic finance and China, the main sponsor of the Belt and Road Initiative. These are presented in this Pause for Thought for the benefit of those who have interest in this field.
Islamic finance is at the brink of the US$3 billion mark1. Although present in almost 135 countries in one form or another, it has yet to achieve a meaningful size beyond the 50 countries where it is recognised as a viable opportunity. Out of these 50, about a third are considered as systemically significant markets with respect to Islamic finance2. The potential of Islamic banking and finance (IBF) is almost three times more than its current size. However, according to some estimates, it will take the industry more than 30 years to fill the gap between the potential and actual size of the industry. For this gap to be filled efficiently, large additional capital injection is required into the global Islamic financial services industry.
The One Belt and One Road (OBOR), or just the Belt & Road Initiative (BRI), attempts to resurrect the old Silk Road through which China had beneficially plugged itself into the world trade system of the past. It has 65 signatories so far, with a number of other countries showing an interest to join. About half of these are the countries where IBF is an important sector, with about 11 countries that may be classified under the IMF’s systematically significant Islamic financial markets.
As trade and logistics are central to the BRI, it has great relevance to IBF that itself has thrived as a trade-based financial system. In this respect, the role of the International Islamic Trade Finance Corporation (ITFC), a subsidiary of Islamic Development Bank (IsDB) should be explored. The Asian Infrastructure Investment Bank (AIIB) has already initiated a dialogue with the Islamic Development Bank (IsDB) to provide infrastructure financing in the IsDB member countries.
In addition to the massive potential that infrastructure projects may have, there is an opportunity for China and other influential countries participating in the BRI to develop trade-based infrastructure in the OBOR region. A commodity-based liquidity management solution needs to be developed, which should be an improvement over the existing arrangements based on commodity Murabaha. London has played a central role in this respect, and this may very well be the time for China to develop an alternative infrastructure in Beijing or Shanghai.
China should also delineate a detailed plan to help the member countries develop economically. It should also work on encouraging economic cooperation amongst the OBOR countries. The basic features of this are already in place, but there is a need to link it to IBF, especially in the countries where it is a significant activity.
Although Chinese government may not need to borrow from outside the country or may have no further appetite for external borrowing (given some recent focus on its burgeoning debt), it is nevertheless important to develop a vibrant Islamic capital market, with a special focus on Sukuk, for the benefit of the participating countries. For example, a multi-billion dollar Sukuk issued by a corporate or a sovereign within the BRI block, backed by the government of China, may help capital-deficit countries like Pakistan that has an ambitious China-Pakistan Economic Corridor (CPEC) as part of the BRI. The likes of AIIB must be lured into using Pakistan as a domicile for the issuing of its Sukuk programme, something that it has contemplated since 2015, with a focus on Hong Kong.
The new political regime in Pakistan must focus on Islamic finance to use it as a major tool to carry out its engagements under CPEC. This is perhaps the most credible opportunity for the government to use Islamic finance as a tool for economic development and for attracting foreign capital into the country. The Asian Development Bank (ADB) has issued a number of Technical Assistance (TA) programmes to help the countries in the BRI region improve their capacity for Islamic banking and finance. The likes of Pakistan, Afghanistan, Tajikistan, Kazakhstan and the Kyrgyz Republic have benefitted from such TAs. All these countries have relevance to the BRI and its success.
If Pakistan decides to miss this opportunity to become a global champion of Islamic finance on the back of BRI, it is bound to lick its wounds afterwards, as other countries have shown serious interest in this proposition. Further delaying its commitment, Pakistan will be a big-time loser in Islamic finance. Kazakhstan is an important contender for this role, as its Astana International Financial Centre (AIFC) is aggressively pursuing an Islamic finance agenda.
With a market share of 16%, the Pakistani banking sector can further be boosted by the recently constituted CPEC Authority in Pakistan. It must immediately set up a specialised department of Islamic finance within its jurisdiction to assess the role Islamic finance can play in achieving the goals of the economic development policy in the country.
